Macro Chapter 7

Rocky Gap Furniture employs 10 workers working eight hours each to produce 100 rocking chairs. What is the productivity of these workers?

1.25 chairs per hour

Rule of 70

Approx. number of years it takes for amount to double in value by using rule of 70 70/ growth rate (%) = # of years to amount to double

Diminishing returns to capital

Each additional unit of capital provides a smaller increase in output then previous units of capital

The Role of government

Promoting economic growth with an effective legal system Contributes to physical and human capital and technology (infrastructure) Enforcement of contracts Protection of property rights stable financial system Maintaing competitive and free trade markets

Push

shift lefts when decreasing supply

If the growth rate in an economy is 2%, its GDP will double in about

35 years.

If output equals A*(5K + 2L), what is output if A equals 2,000, capital equals 10, and labor equals 100?

500,000

Production Function

Converts imports to exports Various combinations of inputs and fixed level of technology Incorporates all factors of production

Catch up effect

Developing countries are able to achieve greater productivity for each unit of capital invested because advantage of using technologies already developed

Long run growth

Economy finds New Resources or finds ways to use existing resources better (shift in PPF) [

Short run growth

Economy makes use of existing but underutilized resources Common during recovery and recession (inside PPF)

Productivity

Extent to which inputs are converted into outputs. Key driver for economic growth When productivity rises so does standard of living worker productivity increases = worker making more per hour

Factors of Production

Land (N) Labor (L) - mental and physical talents of people Human Capital (H) - training and education Physical Capital (K) -used to produce other goods Entreprenuership (A) - technology and ideas

Economic Growth

Measured by the annual percent change in real GDP Reflecting an improvement in the standard of living implementing laws, improving financial markets, and trading with other nations

Production Function Formula

OUTPUT = A * f( L, K, H, N)

Economic growth is most commonly measured in

Real GDP per capita

Investment in human capital

Skills, knowledge, and quality of workers. The overall quality of worker and their productivity improved quality of workers = higher productivity

Compounding

Small rates of growth to turn into substantial increases in income over time The ability of growth to build on previous growth Income increases on top of previous increases in income

Capital - to - labor ratio

The capital employed per worker, A high ratio means higher labor productivity and as a result higher wages

Total factor productivity

The portion of output produced that is not explained by the number of inputs used in production Factors such as: new discoveries change in countries institution

Infrastructure

The public capital of a nation transportation networks, power-genreating plants, transmittion facilities, public education institutions, protection of property rights and dams, and roads

Which of the following resources is an example of infrastructure?

elementary school

When the government enforces contracts between two parties, it is acting in its role to promote economic growth by:

ensuring a stable legal system.

Ways to increase productivity

increase access to natural resources improve quality of life increase capital-to- labor ratio Promote innovation and technology (all increase economic growth)

Investment in human capital is important because:

it increases labor productivity.

In the absence of copyright and patent laws

it is difficult for innovators to profit from their efforts.

More demand

prices increase = demand pull graph shifts right

Real GDP per capita

provides estimate of standard of living When it increases the average output per person is increasing = higher standard of living

Standard of Living

real GDP/ population

The recent global financial instability:

slowed down economic growth. harmed standards of living. caused severe credit crunches.

Which of the following occurrences is the key explanation for the high economic growth in the United States in the past century?

technology improvements

The higher the productivity the...

the higher standard of living

According to Joseph Schumpeter, what is the driving force behind business cycles

waves of innovations